Posted inNewsFSA Spy

The FSA Spy market buzz – 06 September 2019

Products and desired products; Schroders maneuvers; Wealth leaving Hong Kong?; First State hits; Central bank musings; Passive fund worry; Ads from JP Morgan and much more.

Hong Kong had a wake-up call this week. No, not the protests, or Carrie Lam’s withdrawal of the controversial extradition bill, or even the indications that the territory is sliding into a recession amid declining tourist numbers and price cuts in luxury brand shops. No, this week Spy is sticking to his knitting and was interested to read a report by McKinsey that the rapid, apparently inexorable growth in AUM held by private banks in Hong Kong (and Singapore too), if not reversing, is at least showing signs of stagnating. Among McKinsey’s recommendations to prevent a premature sclerosis, the one that caught Spy’s eye was that money managers should offer products that their clients actually want. Of course, a major consultancy firm doesn’t use language like that. Instead it writes about “solutions orientated” products, but your Spy refuses to acknowledge that such expressions have any place in normal society. Anyway, this tumultuous year suggests that the sell side is aware of the desirable products issue. Indeed, all sorts of thematic funds have been offered to punters keen to bet on future growth, such as biotech and natural resources. For rentiers discouraged by negative interest rates, but wary of high yield bonds, each week brings a new fixed maturity product. Products with embedded ESG principles, on the other hand, occupy a discrete category – and echo the point of this rant: They are often presented as what investors want. In Asia, investors might see advertised benefits for the planet as a “good thing”, but what matters most is making money. Boring FMPs or sexy theme funds – it doesn’t matter, so long as investors believe in the likelihood of returns. There’s probably a link here to Brexit, but Spy would prefer not to dwell on another week of national embarrassment and disgrace!

Spy understands that Lieven Debruyne, who runs Schroders Asia-Pacific business, will soon relocate to London and become global head of distribution. He replaces John Troiano, who is retiring. The search for Lieven’s successor is underway.

And speaking of Schroders, the Spy wonders if the firm is on the cusp of making a major onshore move. Recently Schroders said it inked a “long-term strategic agreement” with China’s Bank of Communications across distribution and product development in asset and wealth management. BOC has been its joint venture partner since 2005 and now that China has relaxed regulations for foreign firms to take majority stakes, Spy thinks the agreement could be a prelude to owning the China partner. If so, the firm would follow JP Morgan AM, which won a majority stake in its China partner, CIFM. If Schroders follows, the two big name managers could be the trigger for others with China JVs: Invesco, Credit Suisse, UBS, are perhaps waiting on the sidelines with prepared bids?

Chatter about private wealth shifting out of Hong Kong due to the protests, typically from anonymous sources and permanent residents of certain Lan Kwai Fong imbibing establishments, got Spy to momentarily put down his drink. After a few conversations with fund selectors at private banks in Hong Kong, Spy doesn’t believe the headline. One or two clients have made a general ‘what if’ they wanted to move the account outside Hong Kong inquiry, but no one has done it, your Spy understands. The reason? It’s not a quick decision. First, paperwork, more due diligence, perhaps more KYC, waiting periods and a new client-facing person to get acquainted with. And, as one wealth manager at a private bank told Spy, there is also the proximity factor – clients tend to want the bulk of their wealth in the same place they live. This is a big emotional hurdle for transferring assets – unless the client and family are moving as well.

For all the talk about Hong Kong’s economy in the tank, Spy could not find evidence in funds investing in Hong Kong equities. After stripping out five inverse ETFs, which move in reverse of the market, 36 of 38 funds are in positive territory year-to-date! The Martin Lau/Richard Jones First State Hong Kong Growth Fund is at the top, with an 11.48% return. Can Lau-Jones be the fund industry equivalent of Jagger-Richards? All that said, Spy does understand the goateed bartender, who reminds that the worst is yet to come (as he collects the HK$100 for a 33oml bland Asahi, not even in a frosted glass). But don’t ignore the data: despite several months of social turmoil, a rudderless government and the rising US-China trade tensions, Hong Kong equity funds are doing damn well.

News this week that Russia’s central bank plans a rate cut of 25 basis points sounded all too familiar, until the report said the cut would put the key interest rate at 7% per annum! Spy mused what it must have been like in the pre-crisis days to get a 6-7% buy-and-hold-for-a-long-time bond yield. Today’s bizarre negative interest rates in Europe and Japan prompted a recent warning by ex-Fed chairman Alan Greenspan that negative rates are likely coming to the US. In the US, the rate has indeed started to erode since QE was reversed this year. QE is on, then reversed. The yield curve is inverted, then it’s not. Lower rates fuel the economy, then they don’t. More than a decade after the crisis, Spy gets the idea that the supposed safe hands of the central bank are not so safe after all. Spy longs for the days when fundamentals drove markets and not central banks.

Negative rates should also alert investors to stay out of bond ETFs — a basket of bonds that likely hold some negative yielding paper. But the advice does not seem to be welcome. Bond ETFs assets, which have doubled to $1trn today from 2016, are expected to double again by 2024, according to Blackrock’s I-Shares.

Passive funds are becoming a lightning rod for warnings (of course outside of passive fund behemoth I-Shares). The latest: a “flood of money into index funds” has similarities to subprime CDOs, said Michael Burry, who runs Scion Asset Management, and reaped a windfall return by shorting CDOs before the financial crisis. “Like most bubbles, the longer it goes on, the worse the crash will be,” he said in a recent Bloomberg interview. There is one difference with CDOs, muses Spy. At least index fund strategies are transparent and understood!

In Singapore, JP Morgan has just launched an MRT campaign at Raffles Place, promoting its multi-asset strategies:

And finally, an ad is spotted in Hong Kong – a sign of recovery? Samsung Asset Management has chosen the iconic Hong Kong taxi to promote its ETF:

Until next week…


Part of the Mark Allen Group.